A blog by Joel Barolsky of Barolsky Advisors

Posts Tagged ‘culture’

The empire strikes back

In Articles, Commentary, Legal Technology on 8 October 2021 at 11:20 am

The full text of my opinion piece first published in the Australian Financial Review on 7 October 2021.

The biggest structural change in the Australian legal market over the past 30 years has been the growth of in-house legal teams.

 But while the vast majority of current in-house solicitors received their initial training in private law firms and then moved across to the client side, I predict that the next decade will see a reversal of this trend, particularly at more senior levels.

 In comparing the employee value proposition of in-house versus private practice, there are five areas where law firms are fighting back.

Flexibility

In a post-COVID-19 world, very few law firms will return to a work schedule of 9 to 5, five days a week, in the office. They will be far more accommodating of lawyers seeking to work from home for part of the week, or those wanting to work across different time slots in the day or to limit the number of workdays.

Any perceived advantage that in-house roles were more flexible has been eliminated by law firms learning to operate effectively in an anywhere anytime model.

Workload

For many years, the lure of in-house has been roles with more work-life balance, less stress, and no timesheets. 

While no timesheets are still a point of difference, most in-house lawyers are now reportedly working extremely long hours and are stretched thin. The pressure for them to do more with less is incessant, and the demands on their time are likely to grow rather than diminish. 

On the other side of the fence, many law firms are rejigging the workload of graduates and early career lawyers to be far more sustainable. They have also stepped up their programs focused on employee mental health and wellbeing.

Technology

Association of Corporate Counsel research suggests General Counsel are constrained in adopting technology by restrictions on capital expenditure and a lack of time to implement new systems.

Many law firms, in contrast, are ramping up their technology investment and experimentation. The recent Thomson Reuters State of the Legal Market found that law firms spent over $22,000 per lawyer on legal technology in FY21. The same paper revealed that 30 out of the 50 largest law firms in Australia now have an innovation function.

Over time, the technology gap between in-house and private will grow. A career move in-house may become to be seen as a step back in time – a move to a job using old and blunt tools of the trade.

Income

Data from legal recruiters Mahlab suggests in-house teams pay more for 3 to 7-year PQE lawyers, but after that, the differential starts to swing the other way. Equity partners in premium law firms are now earning incomes that far exceed their peers in in-house roles, save for a few GCs of major listed companies that enjoy exceptional incentive arrangements.

Private practice salaries and benefits are estimated to increase by 8 to 10% in the coming years. It will be very hard for in-house to price match given budget constraints and the need for consistency across organisation-wide pay scales. To the chagrin of many CFOs, in-house lawyers are already the most expensive people on their payroll outside the C-suite.

Culture

“It’s a boys’ club”, has been a common refrain of female lawyers leaving private practice. With an industry average of just under one-third of female law firm partners, their complaint may have had just cause, till now.

Most of the top 30 law firms across Australia have fully committed to a 40:40:20 or an equivalent diversity goal at partner level. Significant efforts are being made to address unconscious bias and to eliminate sexist language and behaviour. More senior leadership roles are filled by women. Comprehensive diversity and inclusion programs are now the norm.

The progress is slow, but the prevailing culture across many law firms is shifting on gender issues.

If trends in the five areas described above persist, the employee value proposition of in-house will become less compelling. With increasing demand, in-house teams will have to build their own capacity by hiring more graduates and invest in early-career legal and commercial training.

This is good news for law firms; after years of training young talent only to lose them to in-house roles, the shoe will comfortably fit on the other foot.

Is your practice in the right shape?

In Uncategorized on 14 August 2021 at 12:10 pm

The full text of my opinion piece first published in the Australian Financial Review on 12 August 2021.

The start of a new financial year often coincides with law firm partners updating their budget and doing a strategy health check.

Targets are usually set around revenue, margins and headcount, as well as qualitative indicators such as client service and staff engagement.

This is great, but there is one critical thing missing.

Practice shape is one of the most important drivers of success but seldom gets a mention. By shape, I mean the number, type and roles of practitioners at different levels within a practice team.

David Maister, in his seminal work, Managing the Professional Services Firm, stated, “many factors play a role in bringing goals [of client service, staff satisfaction and financial success] into harmony, but one has a pre-eminent position: the ratio of junior, middle-level, and senior staff.”

Getting it wrong

Poor practice design can be a handbrake on practice performance.

Being too ‘top heavy’ can result in mid-level lawyers leaving to join other firms with better promotion prospects. It could also lead to deep discounting so as to match competitors with more appropriate leverage.

A ‘bottom-heavy’ practice runs the risk of producing lower quality work and creating burnout and stress for those left to carry the load. (Bottom-heavy is also a good description of me after 18 months of intermittent Covid-19 lockdowns 😀).

A ‘missing middle’ often leads to practice stagnation and major financial opportunity costs. Interestingly, many premium firms are facing this issue right now partly as a result of reduced graduate intake in the mid-2010s.

Bad design can also contribute to systemic under-delegation. Partners who hog all the work make their practice far less competitive over time, not to mention sapping the morale of their people.

Succession is also a whole lot easier when the next generation is there trained, ready and waiting.

AFR August 2021

New shapes

The world has changed since David Maister first published his book in 1993. New technologies, providers, channels and delivery platforms have created new design opportunities beyond the traditional pyramid.

With the rocket model, the left and right corners of the pyramid are cut out and most low-level process work is done using a combination of legal technology, paralegals and law @ scale outsource providers. Rocket practice teams generally have fewer entry-level lawyer positions and more legal operations roles.

The hub and spoke model has a partner at the centre of a network that brings in a range of different resources and modular solutions to solve a specific client problem. These resources may include full-time lawyers in their firm as well as advisors from other professional service firms, the bar, data analysts, client resources and third-party software platforms.

The agency shape splits a practice into specialist groups focused on what they’re best at. A great example of this is the award-winning ad agency, Thinkerbell.

Thinkerbell has two groups: Thinkers and Tinkers. To quote their website, Thinkers are “a cross between strategy-types and suity-types, they ask a lot of questions and listen very carefully for the answers. They’re problem-solvers.”

It says Tinkers are “creativey-types and producery-types who pull things apart and put them back together again. They hit things with hammers and fiddle with knobs and buttons. They experiment, and play and build.”

Revisit your design

So, returning to annual budgets and strategic plans, practice leaders need to ask themselves a few critical questions about their current practice shape:

  • does it help or hinder career advancement and learning opportunities?
  • does it fit with the mix and complexity of the work?
  • does it optimise the business model i.e. how the team makes money?
  • what should the shape look like in three years, and in seven years?
  • what alternatives could be considered?

The agency model might not be a realistic alternative at this time, but it’s essential that leaders keep thinking and tinking when it comes to practice shape.

Where was Minters’ chairman during the Kimmitt crisis?

In Articles, Commentary on 26 March 2021 at 7:28 pm

The full text of my opinion piece first published in the Australian Financial Review on 26 March 2021

“The Minter’s chairman went missing in action. One of the most important jobs of a chair is to resolve major disputes within the partnership without it spilling out to the rest of the firm, and even worse, into client land.”

This quote reflects a sentiment expressed by many law firm leaders I spoke to about the recent saga at MinterEllison.

While I’m not privy to the internal machinations at Minters to say whether this is a fair judgement or not about the firm’s chairman, David O’Brien, it does raise the question as to what should be expected of a chair?

 In my view, the answer lies in the confluence of governance, guidance, and glue.

Governance

The chair of partners usually has an active leadership role in firm governance. As such, his or her job is to ensure that management’s direction is broadly aligned with the interests of equity partners and other stakeholders.

Unlike company structures, partnership governance roles and responsibilities are not stipulated in any statute and are largely ambiguous. All partners are assumed take on all responsibilities concurrently. In this context, the chair and managing partner are expected to carve out a tailored governance framework that balances stewardship, operational efficiency, risk-taking, control, transparency, partner autonomy and accountability.

The chair of partners would usually be expected to facilitate the effective functioning of board and partner meetings, ensure accurate timely and relevant information flow, oversee risk and compliance, manage board composition, and lead the process of reviewing the managing partner’s performance and succession.

In some firms, the chair is actively involved in deciding profit allocation and progression. In other firms, their role is more of an independent arbiter in profit allocation appeals. 

Guidance

While most medium and large firms have adopted a more ‘corporate’ governance model, partners as owner-operators still often want a say when it comes to critical decisions around firm purpose, values, capital allocation and broad strategic direction.

The chair plays a critical role in helping the firm’s executives navigate this decision-making minefield.

Their guidance is critical in deciding which fights to pick, what options are on or off the table, what’s the best approach and forum to raise issues, and where power really lies in and around the partnership.

Chairs often act as cultural barometers – forecasting the mood, energy, and tone of the partnership. Their predictions of an imminent storm, or conversely, a period of calm and confidence can be hugely beneficial.

At a more micro level, firm chairs often act as a sounding board or mentor for the managing partner. In this role, they help talk through tricky issues, provide honest feedback, and offer comfort when exasperation overwhelms.

This mentoring role is particularly important for the induction of new managing partners or an external appointment. In the latter case, the chair needs to lend some of their social capital until the new leader’s position is firmly established. 

Glue

The third role of the chair is to foster partnership cohesion and stability. This doesn’t mean leading the firm cheer squad, but rather putting out spot fires and addressing corrosive politicking.

Spot fires may include a major fallout between two senior partners or where an individual partner has displayed behaviour incongruent with the firm’s values or there is a case of systemic underperformance.

It is quite common for the chair to join the managing partner in having a fireside chat with these problem partners. The chair helps create a sense of deep collective concern. This threat is hoped to be the catalyst necessary to change aberrant behaviour.

Pie-splitting is often a source of ‘corrosive politicking’. For example, in meritocracies choosing a side when there’s a commercial or legal conflict could result in a major differential in individual earnings. In these instances, the chair may get involved in dialling-down the emotions and ensuring that trust in the model is maintained.

Coming back to the MinterEllison situation, I don’t have any first-hand information as to assess whether the firm’s chair did an effective job in governing, guiding, and gluing? As with so many tricky issues in law firm partnerships, that’s ultimately for Mr O’Brien’s partners to decide.

Is HWL Ebsworth Limited a buy?

In Articles, Commentary on 30 August 2020 at 12:35 pm

Full text of my opinion piece first published in the Australian Financial Review on 27 August 2020.

Earlier this week, the Australian Financial Review reported that HWL Ebsworth (HWLE) was preparing to list the firm on the ASX with a $1 Billion-plus valuation.

While details are scant at this stage, it is worth asking whether stockbrokers will recommend a BUY when the HWLE Limited prospectus is issued?

My prediction is they will give this IPO a thumbs down for five main reasons.

#1 Insufficient surplus

As a listed entity, HWLE partners will have to share a portion of the firm’s profits with external shareholders. For the sake of argument assume the current partners enjoy average earnings of $1.5 million per annum. In the future, partner earnings – salary plus bonus minus profit share – might reduce to say $1 million. The incumbent partners will most likely accept a reduced annual income given their significant capital gain upon listing.

This business case seems logical but misses one key point – there is a fiercely competitive market for top talent. Many of the best HWLE partners are proven rainmakers will still be able to command incomes around $1.5 million or more at other non-listed law firms or by setting up their own practice when their employment and escrow handcuffs come off.

At $1 million – the maximum the firm can pay and still maintain dividend payments – HWLE Limited will be way off the mark in attracting any new ‘$1.5 million’ partners.

Over the long term, there’s insufficient surplus to keep both partners and external shareholders happy.

Screen Shot 2020-08-30 at 12.18.35 pm

#2 Clients don’t buy the firm

When Shine Justice Limited first listed on the ASX, they presented strong evidence that their personal injury clients chose them because they trusted the firm’s brand and were largely lawyer agnostic.  When IPH listed, investors were enticed by a large proportion of annuity income from patent and TM renewals and an ambitious plan to scale.

When it comes to HWLE’s mostly business-to-business relationships, research shows that clients are much more discerning around who does their work.

HWLE external shareholders will not be buying a company with a strong brand with sticky institutional client relationships. They will be buying a collection of individual portable practices, each with their own reputation and client following.

#3 Vague growth story

External shareholders examining the IPO prospectus will be looking for a compelling growth story. They will want to see how a fresh capital injection will drive shareholder value.

Under Juan Martinez’s leadership, HWLE has a solid track record of acquiring legal practices without the need to splash much cash. Economies of scale work well in mining but less so in premium legal where even boutique firms can generate supernormal profits. Despite all the hype, there’s no legal technology yet available that will create a sustainable cost or client service advantage. Creating a multi-disciplinary practice or moving offshore is fraught with risk.

So, unless I’m missing something, the growth plan beyond more of the same seems less than convincing.

#4 Key person risk

From interviews with former staff, it appears that Juan Martinez has a robust directed leadership style. Overheads are kept to a minimum and all lawyers are encouraged to be on the tools all the time to compensate for below-market pricing.

This is the operating model that has been the bedrock of HWLE’s success to date.

Given Mr Martinez’s tenure and track record, the market will have many questions over the strength of HWLE’s bench. If the proverbial bus had to arrive who will keep the firm together and herd the cats? I’d imagine the firm’s value will be discounted heavily because of this key person risk.

#5 More losses than wins

Future investors in HWLE will have a good look at the investment category and proceed with caution. A 20-year analysis of law and accounting firm IPOs in Australia reveals far more losses than wins, especially for external investors. This includes firms like Stockfords, Harts and Slater & Gordon.

One of the reasons for these failures is the loss of the partnership culture that underpins their initial success. This culture comes from the incumbent partners’ sense of proprietorship, stewardship, collegiality and identity. Shifting from partner to employee is a big shock to many. Financial transparency, share price volatility and an added compliance burden all often have a negative cultural impact.

In conclusion

I have drawn strong conclusions about the potential float of HWLE without access to any specific details. I look forward to reviewing their IPO prospectus and seeing how wrong I am. But if I’m not, buyer beware!

How your law firm can limit virus hit to bottom line

In Articles, Commentary on 7 August 2020 at 3:42 pm

The full text of my 7 August 2020 opinion piece first published in the Australian Financial Review.

There is every chance that COVID-19 will mean a big hit to your firm’s revenue for the 2020-21 financial year. So, what levers are you using to limit the downside impact on profitability?

Greg Keith, the chief executive of accounting firm Grant Thornton, recently indicated he was anticipating a decline of 8.5 per cent in revenue and 33 per cent in profit.

It means that for every 1 per cent drop in income, they are forecasting a fall of nearly 4 per cent in profits.

Accounting firms, like law firms, are mostly high fixed-cost businesses that are super-sensitive to changes in revenue – both on the downside and the upside.

To limit the profit impact, firms tend to first cut non-essential spending like travel and entertainment. After these “easy” savings are exhausted, reducing staff numbers comes into the frame.

While there are obvious short-term benefits – staffing can comprise 60 per cent of all expenses – there’s a significant risk of not having enough of the right resources on hand when demand picks up. So, the 2020-21 saving needs to be weighed up against the full cost of re-hiring and training in the future.

In my view, there are two areas where firms could do a lot better to enhance profitability without letting people go – pricing and the sharing of resources.

Pricing for profit

Over the last few years, most mid-sized and large firms have worked on their pricing practices.

With a significant market downturn and price war on the cards, one firm recently redoubled its support for partners to preserve and capture value through price. This included video training modules on value articulation, gamified programs around price negotiation, improved analytics, new pricing tools [like Price High or Low 😀] and more direct hand-holding for new business pitches.

Some firms are adopting a range of creative strategies to meet client needs rather than merely dropping price. They include:

  • Adjusting payment terms and conditions so strapped clients are more willing to brief the firm rather than others;
  • Offering non-time-based pricing structures such as subscriptions, contingency fees or amortising fees;
  • Special promotions in ‘ring-fenced’ service areas to avoid across-the-board rate cuts and safeguard the firm’s brand position; and
  • Offering options at different price points.

One law firm offers its clients three pricing options on every new matter. They’ve adapted Qantas’ pricing approach by offering the equivalent of the airline’s Red e-Deal, Flex and Business Class options.  As with Qantas, each option has the same core benefits around quality and reliability but differ in terms of the format of the deliverables, roles, timing and scope.

Another firm analysed their top 100 clients to determine how each was being affected so they could tailor messages and offers. In one instance, this led to a new digital service offering as some clients moved to virtual selling and distributed operations. In another case, they shifted to a self-service model for a client going through a major cost-cutting exercise.

Screen Shot 2020-08-07 at 6.43.54 am

Resource sharing

I was recently advising a law firm where analysis of time records revealed that some individuals and teams were extremely busy while others were well below capacity.

When I asked why resources were not shared to even out workloads, the most common response was that lawyers could not easily work outside their area of specialisation.

Not satisfied with that objection, I delved a bit deeper. My enquiries revealed a range of constraints – cultural, structural and personality – to collaboration. For some partners, “letting my people go” was a sign of failure. For others, they didn’t see any direct financial incentive to share resources, so they didn’t bother. In one office, each practice team saw itself as a self-contained business, and the prevailing mindset was more competitive rather than co-operative.

In good times, there’s often enough fat in the system to ignore these problems, But if your firm is looking at an equation that means every 1 per cent drop in revenue leads to a 4 per cent drop in profits, then you might need to change your thinking.

Will new partners need to keep grinding away?

In Articles, Commentary on 13 July 2020 at 6:18 pm

Full text of my opinion piece first published in the Australian Financial Review on 9 July 2020.

Most practice teams in the larger law firms have been set up with partners as the “finders” and “minders” and associates as “grinders”.

A decade’s worth of time records analysed by Thomson Reuters Peer Monitor shows that associates have around 10 more billable hours per month on average than partners in the same firm.

However, in April and May 2020 – the first full months of the COVID-19 lockdown and remote working – this long-term trend reversed and partners recorded more billable hours than associates.

There are two questions worth asking. Why are partners producing more now? Can all the new partners in the Financial Review Law Partnership Survey expect a permanent change in their role? In other words, will they have to be finders, minders and grinders?

AFR July

Why now?

Many law firm clients went into crisis mode with the onset of the coronavirus. Deals needed to be completed quickly. Funding needed to be secured urgently. Disputes on unfulfilled contracts needed rapid resolution. Almost daily changes to government regulation needed interpretation and action.

To deal with these pressing and complex issues many clients indicated a strong preference to get more direct access to partners. This meant fewer opportunities for delegation to associates.

Cost-conscious clients also had less tolerance for juniors being allowed to learn on these matters. As one general counsel put it to me: “I was happy to see one maybe two people [from the law firm] on [Microsoft] Teams, but not a football team.”

Another factor that has led to the increase in partner hours at some firms is partners holding on to more work due to fear of a broader market slowdown so they can hit their personal billing targets.

During the GFC, many large firms cut partner numbers through a combination of de-equitisation, early retirements, dismissals and reduced promotions.

While many firms now prefer measuring the contribution of a team rather than an individual, having a healthy personal practice can strengthen a partner’s case for retention if things get tough. In recent weeks, it appears that some partners and associates have been getting a little tired of working from home.

After the rush of adrenalin in dealing with the crisis and keeping connected during March and April, there’s now slightly less enthusiasm for the weekly video drinks – and growing frustration with the clunkiness of a distributed workforce.

Supervision, training and delegation is hard enough when everyone is co-located and physically present in a purpose-designed city office. It’s that much harder when associates are working from a kitchen table in a shared rental apartment with variable NBN speeds.

As time moves on, some partners might resort to the easier – though strategically flawed – option of doing most of the work themselves.

Will there be a permanent change?

No, and yes.

Leverage of non-partner fee-earners is at the heart of the law firm business model. The economics of having lots of associates doing lots of production will not change in the years ahead. Effective and efficient delivery of larger transactions, projects and disputes will still require teams of lawyers, paralegals and legal technologists at different levels.

Over time, firms that don’t tailor their approach for each project will lose out to those that do.

When demand returns, the issues around less delegation should ease. Intransigent hoarders will get caught out and move on – or be moved on.

As technology and workflows improve over time, the clunkiness of the remote workforce should diminish and become less of a handbrake.

One change that will hopefully stick is that of the law firm partner as the client’s primary strategic risk advisor. The coronavirus crisis has revealed the relevance of experienced lawyers in assisting clients on things that matter. This period should hopefully build their confidence as strategic advisors from a legal perspective and not just narrow technical legal specialists.

The discussion above suggests that perhaps the finder minder grinder characterisation is a little out of date.

A better description of the role of partner is that of a strategic advisor and leader – a thought leader, a team leader, a client account leader, a project leader and a sales leader.

The winners will be those firms that recruit and develop outstanding legal leaders and not just see their associates as high-billable grinders.

A post-corona legal world: more kindness, less paper

In Articles, Commentary on 4 April 2020 at 4:45 pm

Full text of opinion piece first published in the Australian Financial Review on 2 April 2020.

At some point later this year or early next we will move into a post-Corona world. What might that world look like from a law firm perspective? On my reckoning, it will involve deeper relationships, less paper and more flexibility.

Deeper relationships

There is much research that shows that people that go through acute stress together come out at the other end with stronger relationships. War is one of the greatest stresses anyone could ever encounter yet it also often leads to deep human friendships and incredible acts of heroism and sacrifice.

As Stanford’s Emma Seppala states, “Understanding our shared vulnerability — that life makes no promises — may be frightening, but it can inspire kindness, connection, and desire to stand together and support each other.”

To illustrate this point, I heard a story this week of a law firm partner checking in every day with every person in her team via Zoom. These check-ins covered some work matters but mostly were about sharing the fears, loss, grief and the black humour of the pandemic and the remote working experience. She said she encouraged her team members not to avoid interruptions from partners, kids and pets during the video calls.

The partner indicated her surprise as to how deeply personal the conversations had become, and how much closer she felt with her team members. Seeing her team members at home interacting with loved ones added a whole new level of understanding and appreciation of them as individuals.

She imagines a post-corona world with much deeper social connections – with staff and clients. Going through a crisis together can help engender trust and understanding, the foundations of all solid business-to-business relationships.

Screen Shot 2020-04-04 at 4.33.21 pm

Source: AFR

Less paper

Over the past decade, many law firms have invested in sophisticated and expensive document management systems to reduce paper, streamline processes and improve control. It is a common experience that firms don’t realise the full benefits of these systems because a small group of lawyers, often senior partners, refuse to change their habits and prefer to edit in hardcopy only and/or keep paper copies of everything.

The coronavirus has forced some law firm partners to change their rusted-on work habits in about one week. When the hardcopy file is inaccessible and no assistant is at their side, only then will the penny really drop that a change is required and the painful process of stepping outside comfort zones will commence.

In a post-corona world, there will be less paper and greater compliance with enterprise-wide systems that promise so much but often deliver less. Allied to this there is likely to more defined workflows, greater support for cloud-based applications and better use of deal platforms.

As legal project management expert Ron Friedman notes, “Litigation and investigations have long employed [and co-located] armies of contract lawyers to review documents for responsiveness and privilege… The technology exists for secure, remote document review. Though supervision and collaboration may be harder working remotely, it does tap a much broader labour pool [and meet social distancing rules].”

More flexibility

Pre-corona, flexible working arrangements were mostly the exception rather than the rule in law land. The past two weeks have reversed this statistic.

The generally positive experience of meeting via videoconference, accessing files remotely, collaborating online on shared documents and engaging staff and clients virtually has brought a new realisation: actually, we don’t need everyone at the office all the time. If people want the option to work flexibly it can be done without destroying productivity or team dynamics.

While I don’t foresee a shift post-corona to complete remote working or agile office set-ups (that is, an office with no allocated desks), I would expect firms to be far more comfortable with people seeking flexible work arrangements that include some regular time working from home or other locations outside of the office.

Remote working must be balanced with having a team congregate in one space to collaborate to solve complex client problems, to share knowledge and to socialise. There is still no technological substitute for face-to-face interactions and the serendipitous opportunities that come from overhearing conversations – and unexpected bumping into colleagues in corridors and kitchens.

In conclusion

In conclusion, the post-corona legal world will be different. While there’s a lot to fret about, there are also some important positives to reflect and focus on.

Five ways to improve your firm’s balance sheet

In Articles, Commentary, Legal Technology on 8 February 2020 at 4:19 pm

Full text of my opinion piece first published in the Australian Financial Review on 7 February 2020.

Law firm partners focus a lot their profit and loss statements but tend to glance over the asset section of their balance sheets.

This is a missed opportunity.

There are three main reasons assets are largely ignored. Firstly, in ‘zero-in zero-out’ partnerships with 100% dividend payout ratios tracking long-term asset value is relatively less important. Secondly, in some firms, the accountants lump all intangibles into a vague and unhelpful construct called ‘goodwill’. And thirdly, balance sheets tend to list boring things like plant and equipment.

AFR 7 Feb 20 Balance Sheet

Original AFR article

From a strategic management perspective, there is a significant benefit in framing goals around making the firm more valuable. This means identifying all the assets, both tangible and intangible, that the firm uses to create and sustain value.

A more detailed balance sheet can also be useful when it comes to partner performance management. Growth in asset value should be the heart of what’s expected of partners, especially in regard to their non-financial contribution.

Tangible assets are easy to quantify. The intangibles less so.

Here are five important intangible assets in your firm that are worth measuring, protecting and leveraging.

#1 Relationship capital

Relationship or social capital refers to the strength and stickiness of existing client relationships and, where relevant, referrer and community connections.

While there are no simple measures of relationship capital, good proxies include total client lifetime value, client commitment indices, net promoter scores, client loyalty rates, average service mix per client, share of wallet of platinum and gold clients, social network strength and percentage of sole-sourced work.

#2 Human capital

Human capital refers to the quality, performance and commitment of all partners and staff. Management reports often include data on salaries, recruitment, training and turnover, but these don’t get to the heart of tracking human capital growth or depletion. Additional measures might include:

  • Toe-to-toe analysis comparing the quality of key practitioners in the firm versus direct competitors
  • Loyalty and career intention indicators
  • Succession and talent development pipelines by practice area
  • Diversity and inclusion metrics
  • Glassdoor, Seek and social media ratings
  • Employee net promoter scores
  • Leadership capacity and capability
  • Culture maps, highlighting hot spots or blind spots
  • Real-time measures around staff morale, firm climate, employee experience and discretionary effort.

#3 Brand capital

This refers to the strength of the firm’s brand and reputation in key target markets. Traditional measures include brand awareness, consideration, preference, use, board room impact, recommendation and social media following. An ability to attract star recruits is also an indicator of its brand capital.

One benefit of a strong brand is the ability to command a price premium. By way of example, in 2019, Apple’s brand premium enabled it to capture 66% of smartphone industry profits, 32% of overall market revenue while only selling 13% of total handset units.

Proxy measures around the firm’s pricing clout impact might include the percentage of bids won where the firm was priced higher than competitors, depth of discounting and percentage of matters with supernormal margins.

#4 Data capital

Most firms are sitting on mounds of valuable data with most of it stored on disconnected databases collecting digital dust. The main data islands include:

  • client data such as matters delivered, interactions, service feedback, event participation, agreed pricing and billing,
  • staff data such demographics, salaries, tenure, engagement, training, feedback and performance records,
  • operational data such as time records, matters processed, productivity and utilisation, and
  • financial data such as revenue, margins and expenses.

Joining these data sets and applying some smart predictive analytics will allow firms to make much better decisions. For example, the analysis could point to using a specific team with a particular process to do a specific type of matter for a certain client category using a defined pricing model. Each of these choices might mean a 2% improvement, but accumulatively you’re looking at +10% gain without working any harder.

#5 Intellectual capital

The last category is for important bits of firm know-how that don’t neatly fall into one of the other four areas. This might include the proprietary legal products, algorithms, websites, domain names, precedents, templates, applications, patents and trademarks.

Growth in intellectual capital could be assessed by things such as the firm’s investment in research and development and its innovation portfolio. Quantifying the revenue from new products and services can indicate success or otherwise in this asset class.

A call to action…

Take a quick glance over your firm’s strategy papers and board reports over the past 12 months. Is there a way to elevate your firm’s strategic thinking by delving into the intangibles that will sustain your long-term success? I bet there is.

If you enjoy my articles, please consider donating to my team participating in the 100km 2020 Oxfam Trailwalker. Learn more here

Is bigger better?

In Articles, Commentary on 13 December 2019 at 7:20 pm

Full text of my opinion piece first published in the Australian Financial Review on 12 December 2020.

Ranking law firms by size implies in some way that second position is better than 22nd. But is it?

As with many things in the legal business world, the answer is not straightforward.

Gilbert + Tobin is a wonderful case study of a relatively small firm – only 16th in The Australian Financial Review Law Partnership Survey – competing very successfully in every market it chooses to focus on.

The firm is widely recognised as a powerhouse in corporate, banking and dispute resolution and is one of the most profitable commercial firms in the country.

In the US, Wachtell Lipton Rosen & Katz has only 260 attorneys but is No. 2 on the Vault table of best places to work for graduates, first for mergers and acquisitions work and generates in excess of $US6.5 million ($9.5 million) per equity partner per annum.

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Russell McVeagh is regularly ranked as one of the top firms in New Zealand. Their website lists only 36 partners which makes it the smallest firm among its peer group by a significant margin.

Despite these compelling examples, there are four areas where it appears bigger is better.

Lower-cost operators

Australia’s largest partnership, HWL Ebsworth, offers partner rates at 30 per cent – 40 per cent discount to comparable firms. It is able to sustain these rates by having a low-overhead operating platform, maximising the utilisation of it, and consistently increasing the number of partners sharing its cost. Size does yield economies of scale to HWL Ebsworth and others that have adopted this model.

The general insurance market in Australia has converged significantly over the past decade with four major companies now enjoying market dominance. The flow-on from this trend has meant that law firms specialising in insurance have had to get bigger to match the buying power of their key clients. Size helps these firms meet the unrelenting client demands for lower cost legal services and still make a buck, just.

Large matters

Clients do seriously consider the size, or “bench strength”, of the legal teams that compete for large-scale transactions, major projects, investigations or litigation work. Clients want the assurance that there are ample resources in place to manage large workloads without a hitch. They also seek to limit the risk of being reliant on just one or two key individuals; they want the B-team to be just as good as the A-team.

A large practice team also helps firms cope with the volatility of demand. A larger team can smooth out the peaks and troughs over a wider base of work. A smaller team runs a bigger risk of boom-bust actually meaning bust.

Innovation

Many of the new legal technology products that are emerging are based on cutting-edge cognitive technologies. The rough rule of thumb is that 70 per cent – 90 per cent of new products fail. Firms need to be of sufficient size with sufficiently deep pockets to be innovators and wear the cost of failure.

One of the key success factors in legal product innovation is effective distribution. Large firms with a wide reach will clearly have a market access advantage relative to say a smaller firm or a start-up offering a similar application.

Firm size also helps in taking a few more risks when it comes to lateral hire or practice acquisition. Recruiting a cultural terrorist in a small firm can be an existential problem. Larger firms tend to have more options and a bit more resilience to bad hire decisions.

Client panels

Many large corporate and government buyers of legal services have reduced the number of business law firms on their legal service panels.

A byproduct of this trend is that firms of scale, range and reach are often preferred to specialist boutiques. To target this market segment, law firms need to grow to ensure their full-service value proposition remains credible.

In conclusion

So, is bigger better?

Larger firms will generally point to their strengths in critical mass and coverage. Smaller firms will make the most of their focus and agility.

It appears they are both right.

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